The people you hire become some of your best assets. However, wages and employment costs are often one of your biggest expense categories too. So, keeping track of how much money it costs to pay your employees is essential.
But how do you keep track of upcoming payroll expenses?
The answer lies in an accounting category called liabilities—specifically, payroll liabilities.
What Are Payroll Liabilities?
Payroll liabilities are all payroll-related expenses you haven’t paid yet. They can include employee wages, withholdings, employer taxes, and the cost of payroll software.
In contrast, payroll expenses refer to the payroll-related costs you’ve already paid. To put it another way, your liabilities are the payroll costs you still owe; after you’ve paid them, they become expenses.
This is the accounting way of tracking what you owe versus what you’ve paid. Differentiating between paid and unpaid costs helps you understand how much cash you need on hand to pay for expenses.
When you run payroll, your current payroll liabilities convert into expenses. Then, they build up again during the pay period as your employees clock in their hours. Your payroll liability account grows until you run payroll and the cycle begins again.
Are Payroll Liabilities Bad?
Ultimately, payroll liabilities aren’t bad and don’t mean you’re accumulating debt. They pop up continuously as you track one of your most significant expenses: paying your employees.
How Do You Record Payroll Liabilities?
If you prepare a balance sheet for your business, you’ll record payroll liabilities as wages payable and taxes payable under current liabilities. Current liabilities include your short-term expenses, which you expect to pay off in 12 months or less.
Types of Liabilities Associated with Payroll
Now that you’re familiar with the cycle of payroll liabilities and expenses, let's look at the different costs you can track.
Employee Wages and PTO
Unpaid employee wages make up the largest part of your pay-related liabilities. If you hire hourly employees, this amount can change each pay period based on how many hours each employee works.
However, if you have only salaried employees, your payroll expenses will be more predictable. Money paid to employees as part of a PTO plan also counts as a payroll liability.
Tax Withholding
When you issue employee paychecks, you need to withhold two types of taxes: payroll and income. These are known as your payroll tax liabilities.
Payroll taxes are paid for by the employer, such as the employer’s share of Medicare and Social Security tax set up by the Federal Insurance Contributions Act, or FICA.
In contrast, income taxes are paid for by the employee. But instead of your employee making direct tax payments to the IRS, you, as the employer, withhold those taxes from their gross pay each period and deposit them with the IRS.
Here’s a list of tax withholdings that go into the payroll liability account:
- Federal Income Tax: These are taxes you withhold from your employees' net pay and send to the IRS on their behalf. The IRS offers a Federal Tax Withholding Estimator you can use to figure out the best rate based on your employee’s salary.
- State and Local Income Tax: Some states and localities also impose an income tax on employees, which is withheld from their paychecks.
- Social Security and Medicare Tax (FICA): This is a shared tax liability. Employers and employees each pay their half, which is 6.2% for Social Security and 1.45% for Medicare. The employee’s half is withheld from their wages each pay period. Use Form 941 to report and file with the IRS.
- Federal Unemployment Tax (FUTA): This tax is fully paid for by employers and helps fund government unemployment programs. Use Form 940 to report and file with the IRS. The FUTA tax rate is 6.0% on the first $7,000 you pay your employee during the year.
- State Unemployment Tax/SUTA: In some states, employers have to pay an unemployment tax on their employees’ pay. This helps fund state unemployment programs. You can look up your state’s unemployment tax requirements here.
- Workers' Comp Premiums: Your total payroll amount determines how much you have to pay for workers’ comp insurance, so it is also considered a payroll liability.
- Wage Garnishment: The federal government may ask you to withhold a portion of an employee’s wages to ensure they pay for a debt, such as child support. This is a legal procedure, and if you’re required to garnish an employee’s wages, you’ll receive a court order with specific instructions.
Keeping up with payroll tax laws can be confusing and time-consuming. You can make tax withholding easier by using software like Hourly. It automatically processes payroll and pays your taxes and workers’ comp premiums.
Voluntary Contributions
Now that you’re familiar with the different types of withholdings required by the government, let's look at some voluntary payroll deductions you might have to manage.
- Health care payments: If you offer employer-sponsored health insurance, you may need to withhold health care plan payments from an employee’s salary. You may also have to pay the employer portion of their health care premiums. Both of these payments are payroll-related costs and are considered liabilities before you pay them.
- Retirement plans: These include employee and employer contributions to retirement plans, like a 401(k).
- Union dues: If you have employees that are union members, they may choose to have their dues withheld from their paycheck. That means you’ll need to deduct their dues from their total pay and send them to the union on behalf of the employee.
Put simply, anything you need to withhold from an employee’s check and deposit elsewhere is considered a payroll liability until you deposit it. After you’ve paid it, it gets recorded as a payroll expense in your books.
Costs To Run Payroll
Finally, besides wages and withholdings, you should also consider the costs of managing or running payroll. These include fees to a payroll-service provider or the cost of any software you use to process payroll.
How To Calculate Your Payroll Liability
To calculate your total payroll liability amount, all you have to do is add up your current payroll-related costs that haven’t been paid yet.
Let’s look at a simple example where you are a small business owner with one employee named Sara, who earns $8,000 in gross pay weekly.
Here’s what's included on Sara's pay stub.

As you can see, her pay includes the withholdings for her federal and state income tax, state disability tax, and her half of FICA taxes.
While she’ll only take home $624.97 of employee pay, you still pay the $800. You’re just sending parts of her total salary to the IRS as part of your required tax withholdings.
Besides the $800, you’ll have to pay the following payroll-related costs:
- Employer’s portion of FICA payroll tax expense: $61.20
- Monthly subscription for payroll software: $50
- Workers’ comp premium: $36 dollars per month (or $9 per week, which we'll use here since we're looking at weekly figures)
To get your total weekly payroll liability, add up all the costs you need to pay. In this case, it will look like this:
Total Payroll Liability = Sara’s Gross Paycheck + Your Payroll Taxes (FICA) + Payroll Software + Workers’ Comp Premium
Total Payroll Liability = $800 + $61.20 + $50 + $9 = $920.20
Your total payroll liability is $920.20. Once you pay for all the liabilities (Sara’s wages, tax deposits, and software service fee), these costs convert to expenses.
Now, this is a simple example where you only have one employee, and she doesn’t have any voluntary deductions, such as health care plan contributions. But recording payroll liabilities gets more complicated as you grow, hire new people, and offer more benefits.
That’s why we recommend using Hourly to keep track of your payroll obligations for multiple employees so you can save time and avoid errors.
Payroll Liabilities Made Simple
To keep your business running, you need to have enough money to pay employee wages and cover employment costs, such as payroll taxes. That’s why business accounting includes the liabilities category. It’s a valuable tool that shows you your upcoming expenses.
Now that you understand the difference between payroll liabilities and expenses, keeping track of both will be much easier. If you want to streamline your payroll management even further, explore Hourly payroll software. We simplify payroll by automatically filing payroll taxes and managing workers’ comp costs.
1. Introducing Yourself
Your introductory email needs to pack a lot of information into a small package. Try something like this:
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Hello Jane,
My name is John Doe and I work for ABC Agency, where we provide business insurance policies to many of Dallas' rockstar small businesses.
Congratulations on your new business, Jane's Bakery. Are you wondering if you have all the insurance you need? Or if your policies will really cover you in a pinch?
At ABC Agency, we pride ourselves on providing robust, comprehensive coverage options to companies like yours with flexible, pay-as-you-go plans.
Are you available this week to talk more about how we can help? I can help you find the most affordable rates and the best policies out there.
I look forward to speaking with you soon.
Cheers,
John Doe
2. Presenting a Quote
Once you've met with your potential client, a quick reply with their quote will get the ball rolling.
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Hi Jane,
Thanks so much for meeting with me this morning. I loved touring Jane's Bakery–I can still smell those delicious chocolate chip cookies baking! You have a great location, and I'm sure you're going to do great on Front St.
After reviewing my notes, I've pulled together an insurance quote for you (attached). I recommend a business owner's policy. A BOP includes several insurance products in one: liability, property insurance, and business interruption insurance. It offers robust coverage at a competitive price.
I'll call you in a few days to see what you think about this insurance plan. In the meantime, if you have any questions, don't hesitate to email me or call me at [phone number].
Again, thank you for your time today. I look forward to working with you in the future.
Cheers,
John Doe
3. Thanks for Purchasing a Policy
Gratitude is important! It's never a bad idea to thank your clients for their business.
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Hi Jane,
Thank you for choosing a business owner's policy with ABC Agency. We know it's so important to get the right coverage for your business, and we are honoured you've placed your trust in us.
We're excited to work closely with you, and our no. 1 goal is to make sure you're business is always protected.
Do you have any questions? We are here to help. Reach out whenever something comes to mind.
Thank you again for choosing ABC Agency to insure Jane's Bakery.
Cheers,
John Doe
4. Welcome Email
A welcome email helps clients feel like you're there to help–and can softly pitch other insurance products you offer.
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Dear Jane,
Welcome to the ABC family! We are thrilled to have you as a new customer and can't wait to meet all of your insurance needs.
As an independent insurance agency, we work with multiple insurance providers to find the best coverage options for all our customers. If you need any other type of insurance–like [include additional offerings unique to your agency, like life insurance, health insurance, home insurance or anything else]–we can help you too.
Do you want to discuss any of these policies?
Cheers,
John Doe
5. Introducing a New Product
A happy client may want to expand their business with you.
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Hello Jane,
I hope all is well with you and Jane's Bakery. I stopped in yesterday for a blueberry muffin and coffee, and they were delicious. I loved the hint of cinnamon in the muffin! Was that your idea?
I wanted you to be the first to know we are now offering commercial vehicle insurance to our policyholders. Auto insurance for your catering vans is super important since your personal car insurance won't cover them.
We're offering this insurance coverage solely to our current business clients at the moment and have some very competitive rates.
Would you like me to work up a quote for you?
As always, thanks so much for being a part of the ABC family.
Cheers,
John Doe
6. Asking For Referrals
Once your relationship is established and comfortable, let your clients help you grow.
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Hi Jane,
You've been a valuable member of the ABC family for two years now, and we so appreciate your business–not to mention the muffins you supply for our monthly meetings!
Because you are a valued policyholder, I wanted to ask a quick favour. I know you are active in the local Chamber of Commerce, and I'm hoping you might know some colleagues who would benefit from working with our insurance company.
Referrals are one of the most effective ways to connect with our community since people really trust their friends, family and colleagues. Is there anyone you'd recommend I speak with?
Remember that in addition to business insurance products, we offer everything from life insurance policies to pet insurance.
As a thank you for your help, we will send you an Amazon gift card of $100 when your referrals buy insurance from us.
Thanks so much for your help!
Cheers,
John Doe
7. Policy Renewal
If your client needs to renew their policy with you, send an email like this:
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Hi Jane,
I hope you're doing well! What a year it's been—from being listed as one of the top 5 bakeries in Dallas to being an official vendor for the city—you have so much to be proud of.
Just a heads up that your business owner's policy is up for renewal soon and will expire on June 15, 2023.
If you're still happy with the coverage, we can easily renew it for you.
Do you have some time to chat this week?
Looking forward to serving you again!
Cheers,
John Doe